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Ryan Smuts: How to finance a deal when you are investing with someone else

Tuesday, January 21, 2020

When it comes to investing in properties with a partner*, be it a spouse, a friend or colleague, funding rules can differ from lender to lender and would
depend on the nature of the relationship between the parties. The key things to be aware of are outlined below:

For the most part, lenders would assess applicants jointly if the partners are also (de facto) spouses. For example, in the case of Mr & Mrs Smith,
their combined assets, liabilities, income, and outgoings would be assessed, this would be the same across all banks and regardless of purchasing entity
(personal names, company, trust) assuming both parties are part of the proposed entity that is owning the property and borrowing the debt.

Non-spousal partnership applications (e.g. friends, parents + children, colleagues) are treated quite differently. Generally, applications are assessed
on a household basis. For example, if you have Mr & Mrs Parents & Mr & Mrs Children applying for funding, the application would be assessed
based on the Parents’ ability to service the loan in its entirety as well as that of the Childrens’ ability to service the
loan in its entirety. Harsh much? Not really. Home loans commonly make all debtors jointly and severally liable for the total
amount of the debt. While the parties may agree to service the loan in equal portions, the reality is that each party (i.e. household) is responsible
for the TOTAL debt. If one household fails to meet its repayment obligation, the other household will be liable for the full amount. Look at it this
way, in the case of a mortgagee sale where the bank is trying to recoup an unserviced loan, it is not as if they could sell half of the house that’s
why the applications are assessed on each household's ability the service the entire debt.

Still, there isn’t a hard and fast rule. From time to time, lenders could take a more global view of the partnership and arrive at the conclusion that
because each household can look after its own portion of the debt that they will be assessed on that basis. This is rare but it does happen. If you
want to explore this option further you would be well served to work with a broker who knows about each lender’s rules and appetite for market share.

Similar but understandably more complex rules apply when there are more than three partners involved.

You also want to make sure that you are getting good legal and tax advice so that every partner’s interests are taken care of. The best advice I can give
you is that while a good personal relationship would normally underwrite the partnership, at the end of the day partners are proposing to enter into
a business transaction and therefore should treat it as such.

As always, I am more than happy to answer any further questions you may have regarding this or any other property finance-related matters. You can contact
me at ryan@krispedersen.co.nz or on 021 193 9333.

* For the purpose of this article the terms ‘partner’ and ‘partnerships’ refer to two or more people jointly applying for property funding. They are not
intended as specific legal terms.

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